April 2002 Newsletter
Issue Four, Volume Three

BACK TO THE FUNDAMENTALS

By Mike Gasior

This month has proven to be interesting to me on many different levels and there were lots of fascinating topics which I considered covering. After reviewing my copious notations and a desktop littered with press clippings, I've arrived at a month spent on the fundamentals of life and the economy. There has been much time spent by me in this newsletter talking about how obvious things can seem to me sometimes and my wonderment about why so few other people seem to see these things that are crystal clear to me.

For those above reasons I summarize my feelings in Mike's "Six Rules" which I think cut through all the crap and get to the point about my thoughts regarding the future.

MIKE'S SIX RULES FOR RIGHT NOW

RULE NUMBER ONE – OVER LONG PERIODS OF TIME, THE STOCK MARKET RETURNS MORE TO INVESTORS THAN ANY OTHER INVESTMENT VEHICLE.

Many might wonder why I start with this rule but the reason is actually pretty simple; most people who follow my opinions could perhaps find this somewhat hard to believe. But…I do honestly believe this rule with all my heart and wanted to be on record saying so.

In my December 2001 Newsletter I stated that the Dow Jones Industrials would close 2002 at 9,000 and the NASDAQ would be below 1,750. Well, as of Friday April 26th the Dow was already at 9,910.72 and the NASDAQ at 1,663.89. I actually believe both could drop much more before the end of the year.

However, if you were to ask me to predict what level the Dow Jones Industrials might close at on December 31st, 2022 I would predict something in excess of 50,000. There not even be too much angst on my part with my prediction since it is half as good as the market performed in the 20 years from 1982 until 2002.

So if I was 20, 25, 30, 35 and maybe even 40 years old I would probably be shoveling into my retirement account ALL the money I could possibly afford to contribute. I've said to many of my seminar audiences during recent programs that I never understand it when I hear 25 year olds lamenting the state of the current markets and the levels of their retirement accounts. "What do you care?" is all I can ask them. Their retirement is so far away they can't see it with a telescope so I don't see the reason that this bums them out. What they should be hoping for is ten miserable years of stock market returns so they can shovel money into these accounts hand over fist in order to position themselves for retirement. My honest opinion is that people currently between 20 and 25 will have an opportunity to arrive into retirement much fatter than someone like me who is twenty years older than them. My age demographic just enjoyed the stock market of a lifetime and now it's over. Any other bull markets will likely come at an age where we ought to be avoiding stocks.

RULE NUMBER TWO – OVER SHORT AND MEDIUM TERM TIMEFRAMES, MANY OTHER ASSETS CAN OUTPERFORM STOCKS.

This rule begets my current opinion. I personally think that there are many other asset classes that will outperform stocks during the next ten years. In March of 2000 when the NASDAQ had just broken 5,000 (that exact day to be precise) I wrote my newsletter saying that the NASDAQ would drop from the current level and that we would not see 5,000 again for a decade. The onslaught of "you suck" emails buried me, but I am already over two years into being correct and am losing no sleep over my prediction. Truthfully, I think it may take even longer than my original ten years for the NASDAQ to regain 5,000, but I'll stay my course.

I've beaten the following statistic into your heads over the past few years, and still many of you refuse to commit it to memory:

December 31, 1964 – Dow Jones Industrials 874.31

December 31, 1981 – Dow Jones Industrials 875.00

There are seventeen years for you to be keenly aware of since my opinion here is vivid; we are currently entering a period in market history, which will be acutely similar to that timeframe. Feel free to print off a copy of this edition of newsletter and put it in your desk drawer for continuous reference. We have a decade of indifference coming in the stock market and people should face what their future might look like if I'm correct on this one.

RULE NUMBER THREE – THE HUMAN LEARNING CURVE IS OFTEN TABLETOP FLAT.

I'm not sure that I want to come up with a thousand examples of why I believe this rule since I truly hope you have a thousand examples of your own. This rule is why politicians never seem to learn anything from the mistakes of those who came before them and why the Middle East is going to continue to be a problem area.

The reason that this rule is in position number three is to belay my thoughts in rules one and two and in the upcoming rule four.

I also bring up this rule because of my study during the past month of what occurred at All-first Financial, which is a subsidiary of Allied Irish Banks of Dublin. They had a trader by the name of John Rusnack who was able to conceal losses that would ultimately total $691 million, which were the result of trading losses in the currency markets.

It troubled me during my research that he not only got away with hiding his activities and losses for five years, but that his story has many EXACT parallels to the Nick Leeson story at Barings Bank only a few years ago. Many of you have attended one of my live seminars where I detail exactly what went wrong down there in Singapore with our friend Mr. Leeson and how obvious the whole situation should have been to the senior management of Barings.

Not only does the story of All-first and Mr. Rusnack follow nearly the EXACT trajectory as Mr. Leeson, but it also took place at another U.K. bank only several years after a financial disaster, which was Barings. A reasonable person would have thought that the Barings/Leeson train wreck would have served as a "wake up" call to other financial institutions to revamp and review their trading operations.

Another prediction I am willing to make right here and now, is that All-first won't be the last story we read like this. Even after two extensive disasters to serve as examples of what could go wrong there will be others before too long.

RULE FOUR – THERE HAS NOT BEEN PEACE IN THE MIDDLE EAST FOR THOUSANDS OF YEARS AND THERE WON'T BE ANY HAPPENING SOON.

The conflicts currently at hand in the Middle East have been there for centuries and will not resolve themselves easily or anytime soon.

I take crap from readers sometimes for mentioning things that don't seem to be economically or financially orientated, like picking on the occasional idiot politician and this might seem like one of those times. We all, however, witnessed the Crown Prince of Saudi Arabia visit President Bush in Texas last week. The only definitive item mentioned by President Bush and the media was that Saudi Arabia would not withhold oil as a weapon against the West. I was watching Don Imus on MSNBC this morning and heard a great line from one of his guests, Bo Deedle. He suggested that maybe we should skip Iraq and just roll into Saudi Arabia and Kuwait and take all their oil. Then simply ask "So now whattya gonna do?"

The possibility of unrest in the Middle East escalating is not only possible, it is highly probable. Oil prices have already begun to rise and these increases have managed to even manifest themselves at the gas pump quickly. Further increases would be a blow to an already tepid recovery in the U.S. and many European economies, which makes this a financial and economic story for me.

The problems at work in the Middle East today, and during past centuries, will continue to exist no matter how much the West tries to intervene and mediate in the situation. There are too many hard feelings, too much distrust, too many people, too many different religions and too much history for all to just disappear and be forgotten. All that I, and many others can hope is that it doesn't serve as a tinderbox for some version of World War III, which it is certainly capable of. I just saw on the news this evening little girls dressed as suicide bombers in Baghdad celebrating Saddam Hussein's birthday. Anyone who thinks this situation is going to be fixed easily or soon, or that September 11th was the last assault on the U.S. is deluding themselves.

RULE FIVE – WHEN THE GOING GETS TOUGH, THE BOND MARKET GETS GOING.

When I "came up" on Wall Street, the bond market ruled the world and Salomon Brothers ruled the bond market. Coming out of the stock market of the 1970's I couldn't have held a gun to your head and got you to buy stocks because the stock markets returns had been so dismal.

Then came the seventeen years from 1982 until 1999 when the bond market became the forgotten stepchild of the investment world and stock garnered the attention of not only the evening news, but also even the morning programs. People who think I was some sort of genius for predicting the top of the NASDAQ two years ago might want to consider crediting Katie Couric of NBC for it instead. I can tell you that the Today Show, Good Morning America and whatever the heck CBS calls their horrible morning program rarely, if ever, mentioned the stock market even during the "go go" days of the 1980's (my heyday). But when Katie was mentioning the stock market something like three of four days a week, I knew that the end would have to come soon.

The bond market didn't disappear during those seventeen years. It actually exploded in its size and sophistication during that time period with the creation of many of the products (CMO, ABS, CMBS, High Yield "Junk" Bonds and 144a Debt), which line the portfolios of my clients today. The bond market just languished off-stage while the stock markets basked in the warm glow of the media glare.

Well slow and steady not only wins many races, but also allows for comfortable sleep patterns and long- term success in the investment community. Most Americans wouldn't know who Bill Gross was if they ran him over in some parking lot, but the financial media is suddenly discovering the man that many like myself have held in the highest regard for lots of years. Bill Gross runs PIMCO, which manages several hundred billion dollars worth of assets, which are primarily fixed income. If YOU don't know who Bill Gross is either, he is the current reigning King of the Bond Market and is everything to bonds that Warren Buffet or Peter Lynch ever was to the stock market. Should you should ever have the chance to read any pearl of wisdom that was expressed by Mr. Gross you should read the words carefully and repeatedly since he is about as smart as people get.

Mr. Gross tries to stop short of saying it quite this bluntly (that's what you people have me for), but in recent forays into the media I have begun to sense that he believes the same thing that I do, which is that the stock market has run it's course and that the bond market will outperform stocks during the coming decade.

Here is a metaphor from me that I hope will sum up my opinion about bonds:

"If bonds were a man, you would want your daughter to marry this one."

Lots and lots and LOTS of you have heard me say this in person, but this will be the first time I've added it to this publication. Whenever people ask me if I'll allow my daughter to collect Beanie Babies or Pokeman or other such nonsense, my answer is fast and easy; "The only thing my daughter is ever collecting is triple A rated, insured bonds." Period. Paragraph.

Bonds will be the investment of the coming decade.

RULE SIX – ALMOST ANYBODY YOU SEE PREDICTING THE STOCK MARKET OR ECONOMY ON TELEVISION IS AN IDIOT OR AN EGOMANIAC.

While this might seem somewhat harsh there is more truth here than even the idiots and egomaniacs would want to admit. Many of you might be wondering why I haven't included newsletter authors as part of this horrible group, but my predictions tend to be more macro in viewpoint and even my numeric market targets are extrapolated from my expansive macro viewpoints for the purpose of mass consumption. If I truly had any actual insights into what markets were going to do in the short term, do you think I would even share them with you?? You don't even pay me for this damn newsletter, much less for managing your money for you. When I can finally predict the short-term movements that would result in massive trading profits I would be on my 115-foot sloop somewhere off Grand Cayman fishing and watching TV. This newsletter would cease to exist.

But here is a dismal and sobering fact to consider:

--Year in and year out, 70% of "professional" money managers will NOT beat the market.

These people I'm talking about are EXTREMELY smart people. People with advanced degrees from the world's best schools and CFA designations after their names. People with more money than God available to trade with technology on their desktops I don't even know is invented yet. Even the ones who manage to be part of the 30% group who beat the market during the current year, and maybe even a successive year or two, can count on moving back into the 70% neighborhood sooner or later. That's just how things work.

Smart people have been unable to predict the markets since the beginning of time. You should ask yourself why the people who I currently watch on television proclaiming that the recession is over are the exact SAME people who never predicted the recession in the first place. Yet people believe them.

Here is the list I want you to save of people who you SHOULD listen to if you ever see them on TV making predictions about the markets:

--Warren Buffet

--George Soros

--Peter Lynch

--Bill Gross

--Michael Milken

That's my list. These are the only people during the last 50 years who seem to have clearly proven themselves capable of predicting what markets might, or might not do. They are literally the only five people on earth whose advice I would follow if they were to ever give it to me. If you see anyone other than them, these people don't know anything and should be summarily dismissed by you. That's my rule. People who actually know important things don't share these thoughts with a broad audience.

ON A LIGHTER NOTE

A SIGN OF THE APOCALYPSE??

I just read that in excess of 100,000 people will sit for a CFA exam shortly, which is an all-time record high. I'd like to claim a teeny, weeny small credit for this since I pitch the CFA designation nearly every time I teach throughout the year.

My only worry is that this could be viewed as a contrary indicator for the markets. Whenever you have so many people seeking to get closer to the markets by pursuing the most prestigious designation in the financial community it deserves to be noticed and noted. The only point I'm making is that I remember the record levels of people taking their exams to become stockbrokers right before the crash of 1987.

To all my friends at AIMR who bestow the CFA designation, I wish you luck grading all these exams.

A LITTLE BRAIN TEASER FOR YOU

Someone gave me this riddle last week and I thought it was pretty cute. It took me about five minutes to figure out and I thought you might enjoy it. Feel free to send it along to friends of yours.

"A local florist sets prices for the flowers in her shop based on her own logic. A rose costs $0.16, a nasturtium $0.42, and a jonquil is $0.29. Using the same logic, how much will a tulip cost?"

If you want the answer, just reply to this newsletter and ask me for it. I'll send it back to you via e- mail.

NEW YORK AND GRAND CAYMAN PROGRAMS

I am very excited at the response to our weeklong series of seminars in New York City and Grand Cayman. The New York week begins June 10th and the Grand Cayman week begins July 29th. The topics are all unique and timely and you can still register for any of the sessions.

For more information or to register, please visit:

http://www.afs-seminars.com/schedule.html

http://www.afs-seminars.com/cayman.html

Keep your eyes open for some very interesting topics I'm currently researching for next month's edition.

http://www.afs-seminars.com

Copyright 2002, Michael Gasior. All Rights Reserved.

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